Date: 20100422
Docket: T-1082-09
Citation: 2010 FC 435
Ottawa,
Ontario, April 22, 2010
PRESENT: The Honourable Mr. Justice Zinn
BETWEEN:
NEDZA
ENTERPRISES LTD.
Applicant
and
CANADA
REVENUE AGENCY
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1]
This is an application for
judicial review of a decision by the Assistant Director of the Canada Revenue
Agency’s (CRA) Surrey Tax Services Office, dated June 5, 2009, not to grant the
applicant taxpayer relief from the penalty levied against it under the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) for repeat late filing.
[2]
The Assistant Director determined
that the extraordinary circumstances relied on by the corporate taxpayer
applied to only one of its four directors and, as it had other directors, the
taxpayer was not justified in filing its tax return late.
[3]
For the reasons that follow, this
application is dismissed.
Background
[4]
Nedza
Enterprises Ltd. (Nedza) owned and operated a motel and restaurant in Prince
Rupert,
B.C.. Nedza’s four directors each own one quarter of the shares in the
corporation. They are Roy and Joyce Wong, and Roy’s sister,
Irene Mar, and her husband, Ray Mar.
[5]
Roy
and Joyce operated the motel while Ray and Irene had little involvement in
day-to-day operations. When Roy developed a chronic heart illness his
involvement in its operations diminished significantly. This left Joyce
responsible for Nedza as well as the couple’s other two small businesses.
[6]
Nedza’s
fiscal year-end is May 31st. Corporate tax returns are due within
six months after a corporation’s fiscal year-end. Thus, Nezda was required to
file its tax returns on or before November 30th of each year.
[7]
Nedza
sold the motel and restaurant business in June 2006 for $1,259,999. The proceeds
from this sale were included in Nedza’s tax return for its fiscal year ending
May 31, 2007 which was to be filed no later than November 30, 2007.
[8]
On
September 9, 2007, Joyce learned that her sister in Singapore had been
arrested by the police for behaviour on her part that was caused by a mental
illness from which she suffers. Joyce and Roy travelled to Singapore on September
10, 2007 and brought her sister back to Canada on September
27, 2007.
[9]
Nedza
did not file its 2007 return by November 30, 2007. On April 18, 2008 the CRA
issued it a Request to File the return which was followed, on June 3, 2008, by
a Demand to File.
[10]
On
July 9, 2008, Nedza requested, and was granted, a 60-day extension of time to
file the return. On September 25, 2008 a further 60-day extension was sought
and granted. Nedza had until November 15, 2008 to file its 2007 return and it
did so on November 14, 2008.
[11]
The
Minister assessed Nedza, imposing a penalty for late filing and also a penalty
for repeat failure to file of $68,576.32 under subsection 162(2) of the Act.
It is this repeat failure to file penalty that is at issue.
[12]
By
letter dated January 28, 2009, Nedza, under the taxpayer relief provisions,
requested that the CRA cancel or waive the repeat failure to file penalty. In
its submission, Nedza stated that “Joyce and Roy Wong were unable to meet their
tax obligations due to a series of extraordinary circumstances beyond their
control.” These circumstances may be summarized as the following:
(a) Roy has a heart
condition and therefore Joyce manages all of their business and personal
affairs;
(b) Joyce’s
sister was arrested in Singapore in September 9, 2007 and Joyce and Roy
immediately flew to assist her, bringing her back to Canada on September
27, 2007;
(c) Roy,
Joyce and her sister were involved in a car accident on January 6, 2008;
(d) Joyce
and her sister travelled back to Singapore on May 6, 2008 and
Joyce returned to Canada on May 22, 2008; and
(e) Due
to the stress of these events it took Joyce “several months to retrieve the
documents required and compile the records to prepare the required filings.”
[13]
The
response of CRA dated March 17, 2009 reads in part, as follows:
Although we sympathize with
Mrs. Wong regarding the unfortunate events she’s had to endure, it is the
responsibility of all directors of a corporation to ensure various legal,
financial and tax obligations are met. The documents provided do not
demonstrate how Mrs. Wong’s hardship prevented the other directors from meeting
the corporation’s tax obligations. Furthermore, a review of our records reveal
[sic] this corporation has a history of late filing T2 returns. All the
returns for tax years 1995 through 2007 have been filed from three to
twenty-seven months late. This precedent does not demonstrate due diligence in
the handling of this corporation’s tax affairs.
Based on the above
information, the corporation’s situation does not qualify for cancellation of
the repeat failure to file penalty, and the penalty will not be reversed.
[14]
By
letter dated March 23, 2009, the applicant requested a “second review” of the
March 17, 2009 decision. The additional arguments advanced may be
summarized as the following:
(a) Although
the company has four directors, Roy and Joyce have always looked after the financial
affaires of Nedza and they have always signed the financial statements and tax
returns of the corporation;
(b) An
extension of the time for filing was requested and granted by the CRA and thus,
“it appears contradictory that an extension can be granted but then a penalty
is being levied;” and
(c) Although
Nedza has been late previously in filing its returns, it always paid any
related penalty and interest.
[15]
This
plea was rejected by letter of June 5, 2009. It is this decision that is under
review. That decision states, in part, the following:
The responsibility for filing
tax returns lies with the corporation’s directors and representatives. There
existed three other directors that could have taken the applicable steps to
ensure the corporation meet its tax obligations. When the tax returns could
not be filed on time, the corporation should have submitted estimated tax
returns prior to due date. These returns could have been adjusted at a future
date, once the required information was available. The estimation of tax could
have been made.
The extension to file the tax
return was granted by the department to ensure compliance action would not be
initiated during this time. Please be advised, an extension to file does not suspend
penalties from being assessed.
After carefully considering
the facts of the case along with your submissions as they relate to the
applicable legislation, we have concluded the decision made at the first level
was appropriate. Your request for relief under Fairness Provisions of the
Income Tax is therefore denied.
[16]
At
the hearing, the applicant sought leave to file an affidavit from its
accountant. The respondent consented, subject to the correction of some dates
therein, and I indicated that it was accepted subject to those corrections.
[17]
This
new evidence, which would have been available to the respondent, shows the
filing history of the applicant for the three years preceeding the 2007 tax
year. It shows that in each of those years the taxpayer filed its return late.
Only in tax year 2004 was any tax owing, as the applicant had a loss in the
next two years. The tax payable for tax year 2004 was $5185.00 and it incurred
a late filing penalty of $118.56.
Issues
[18]
The
issues in dispute, as disclosed in the parties’ memoranda and oral submissions,
are as follows:
1. Whether the
Minister fettered his discretion;
2. Whether
the Minister breached the duty of fairness in exercising his discretion; and
3. Whether the
Minister’s exercise of discretion was unreasonable.
Analysis
1. Whether the Minister fettered his discretion?
[19]
The
applicant submits that the Minister was “slavish to the guidelines … treating
them as too hard and fast where they are merely examples” and that he fettered
his discretion as a result. Paragraphs 23, 24 and 32 of IC07-1 ‘Taxpayer
Relief Provisions” provide guidance to those required to determine whether to
cancel or waive penalty and interest assessments. The applicant submits that
the Minister “glossed” over paragraph 24 which provides that “The Minister may
also grant relief if a taxpayer’s circumstances do not fall within the
situations stated in ¶23.”
[20]
Specifically,
the applicant submits that the Minister should have considered the amount of
the penalty assessed in light of the size of the applicant’s previous
assessments and its reasonable expectation that no repeat penalty would be
assessed as none had been in the past.
[21]
These
may have been valid factors for the Minister to consider; however, they were
not put before the Minister in the submissions made by the applicant. It is
not required that the Minister turn his mind independently to every possible
submission that a taxpayer may be in a position to make. What is required is
that the Minister turns his mind to those submissions that were made and that
was done by the Minister in this case.
2. Whether
the Minister breached the duty of fairness in exercising his discretion?
[22]
The
applicant submits that the Minister breached the duty of fairness by granting
the applicant an extension of time to file its return but then assessed it with
a late filing penalty having failed to notify the applicant that all its
directors were expected to take responsibility for the tax filing, and assuming
that the other directors were capable of assuming this responsibility.
[23]
This
submission is without merit.
[24]
Legitimate
expectations do not create substantive rights: Reference re Canada
Assistance Plan (Canada), [1991] 2 S.C.R. 525.
While the parties may have believed that the extension of time to file meant
that they would not be assessed with a late filing penalty, let alone a repeat
late filing penalty, there was nothing in the grant of an extension of time
that suggested the potential for a late filing penalty did not exist. In any
event, at the time the extension of time was granted, the applicant was already
more than 7 months late in filing its return. The extension of time did not
waive the CRA’s discretion to apply a late filing or repeat late filing penalty
in its assessment of the taxpayer. What the extension of time did was shield
the applicant from liability for summary conviction based on non-filing, and
the penalties that come with such a conviction: See subsection 238(1) of the Income
Tax Act.
[25]
When
businesses are incorporated and individuals accept to become directors of those
businesses they accept both the benefits and obligations that come with
incorporation. One of those obligations is that directors equally share
responsibility for meeting the corporation’s tax filing requirements. Nedza
could have been structured such that the passive investors were not directors,
but it was not. The CRA was not obligated to explain the basics of business
law to the applicant or its directors. The directors were responsible for
understanding their own obligations and that of the corporation they were
charged with overseeing. The Minister did not breach the duty of fairness in taking
the view that any of the other three directors could meet Nedza’s tax filing
obligations. No information was provided to the respondent that suggests that
they could not have assumed that responsibility other than the statement made
that they had not done so in the past.
3. Was the
Minister’s exercise of discretion unreasonable?
[26]
The
applicant submits that the Minister erred in considering that Nedza could have
filed an estimated tax return in lieu of a certified correct return. The
applicant further argues that the Minister erred in “assuming that the other
directors had not been sidelined by relying upon the grant of an extension of
time” and by taking an inconsistent position in applying a penalty after
granting an extension.
[27]
The
Minister’s mention of the applicant’s failure to file an uncertified estimated
return raises a question as there appears to be no statutory authority for such
a procedure. Nonetheless, even if this statement was made in error, I am not
satisfied that it renders the entire decision unreasonable. This factor was
one of many on which the decision-maker relied. Central to the
decision-maker’s reasoning was that the extraordinary circumstances advanced by
the taxpayer did not explain why the other directors ought not to be held to
their duties and responsibilities to Nedza as directors. In my view, this
finding was reasonable and determinative of the request for relief.
[28]
In
my assessment, the
Minister considered all the submissions of the applicant, and reasonably
concluded that these did not justify the other directors’ failure to perform
their roles as directors of Nedza. In reaching this conclusion, the Minister
did not fetter his conclusion and met the duty of fairness. For these reasons
this application is dismissed.
[29]
The
respondent is entitled to its costs. The respondent may tax its costs in
accordance with Rule 407 of the Federal Courts Rules or, in the
alternative, the respondent may elect to have its costs in the amount I view to
be reasonable, which amount is $2000.00.
JUDGMENT
THIS COURT
ORDERS AND ADJUDGES that this
application is dismissed with costs in accordance with the Reasons for
Judgment.
“Russel
W. Zinn”
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